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Identify Your Blind Spot in Investing: The Secret Sauce Behind a Smart Investment

Nov 16, 2018 12:43 PM 5 min read
Editorial

Before discussing a Blind Spot, I would request you to perform an experiment.

 

Keep your screen at an arm’s length distance away and observe the below image. Now, close your right eye and look directly at the motor-cyclist on the right with your left eye. You’ll observe that you can see the left motor-cyclist on the left as well.

Blind Spot Experiment
Source: AdWeek

 

Now, slowly, with your right eye closed, start moving your screen closer to your face. During this process, keep a check on the left motor-cyclist while you continue watching the right motor-cyclist with your left eye. At a certain point, while moving your screen towards your face, you’ll observe that the left motor-cyclist disappears and then re-appears again.

 

The point where the left motor-cyclist disappears is called the Blind Spot. It’s a part of our retina where there are no photoreceptors. This is a portion in our field of vision where things appear to be missing.

 

The reason it happens is that our brain fills in the blind spot with the background color. Just like in the above image, the motor-cyclist gets replaced with the surrounding light azure blue color.

 

World War II had ended in the year 1945. Two years later, the world slipped into the blanket of Cold War. Two Superpowers, the Soviet Union and United States at opposite ends, made for a bipolar world. During this period, no major war was directly fought. Only regional conflicts were accentuated, thanks to opposing loyalties.

 Identify Your Blind Spot in Investing: The Secret Sauce Behind a Smart Investment

 

In the end, the US and its allies came on top, while the Soviet Union split.

 

Many new nations emerged and became members of NATO (it’s a military alliance between the independent countries of the US and Europe to mutually defend each other whenever an external party attacks), including Hungary, Czech Republic, and Poland.

 

Even after all these year, the new members haven’t been able to develop a defensive military shield, let alone contribute towards the military alliance. Besides, the old members haven’t been effective in assisting the new ones. As a consequence, new members continue to strive to create modern defense capabilities.

 

Reason: Western Officials fail to understand that technical advice alone can’t bring the reliable modern warfare capabilities. It’s the NATO’s blind spot in spotting the lack of political reforms in these countries. Consequently, the armed forces of the new members have failed to modernize their defense planning methods.

 

Author Thomas Young has done a remarkable job by penning down these details in his book Anatomy of Post-Communist European Defense Institutions. It’s highly recommended if you are fond of reading History books.

 

More often, during our investing journey, we tend to ignore the presence of what seems invisible to us. Under the influence of over-confidence and emotions, they hardly get any attention. Henceforth, this ignorance turns out to be costly and affects our returns massively.

 

Listed below are few of the blind spots that I can think of.

 

  • Assuming that the past performance will continue to sustain forever.

With the onset of 2014, the Small Cap Index started picking up the momentum. From a 4-figure value of 6,514, it continued its upward rally and attained a 5-figure value of 19,883 at the end of 2017. Almost 3-times.

Small Cap Index Rally (2014-2017) |

Source: Money Control

 

Assuming that the market would continue to perform this way, a lot of investors began their investing journey at the peak. They ignored the fact that equities are volatile. They forgot that what goes up must come down.

 

And yet, with a rosy perception, they infused their life savings in buying overvalued small-cap stocks and mutual funds while expecting remarkable returns in the short-term.

 

But the market had something else to offer. Tagged as “Over-Valued”, it changed its course of action and started declining from 2018 onwards.

Decline in the Small Cap Index (2018) |
Source: Money Control

 

Within a span of 11 months, the Index has lost its value by 31%. As a result, many quality stocks have dropped since, and investor portfolios continue to bleed.

 

Under the influence of upside movements, it’s a blind spot that we often fail to pay attention to.

 

  • Turning a blind eye towards quality.

Influenced by last year's returns, investors started investing in everything that went up. A fear of missing out was prominent. Paying no heed to fundamentals had almost become a fad. And then, 2018 arrived. The Bears started attacking the overcharged Bulls. Both quality and junk started feeling the heat.

 

When panic arrived, they rushed to sell their holdings. They sold-off their stocks and booked the losses.

 

More often, with a mindset of checking stock prices daily, we miss examining the fundamentals in the first place. Indeed, a blind spot of ignoring the existence of fundamentally strong businesses!

 

  • Ignoring inflation while investing in fixed-return assets.

Inflation erodes the purchasing power of what we earn today. Sadly, we often fail to take account of it. For instance, the volume of groceries that once can buy with Rs.100 is smaller than what we could have bought 5 years ago.

 

With an average inflation of 6% and a fixed return of 9%, obviously no one would love to lose the 66% of the future purchasing power during the retirements. A minute percentage can make a substantial difference.

 

The decline during the Dot-Com era, 2008 Depression and the recent carnage in the market has led a lot of panic-stricken investors to invest conservatively. And by investing completely in the fixed-return assets such as FDs, Bonds, etc. we totally ignore the impact of inflation on our future returns. Another blind spot that certainly exists.

 

As an investor, if we come across the blind spots of Mr. Market, our returns may get impacted. A sudden left turn by the market can get us killed.

 

We all have our own blind spots. And detecting them is not an easy task. Down the line, they impact our investment decisions and affect us negatively. Thus, it’s better to stay connected with the people who can help us manage these blind spots.

 

What’s your blind spot? Do mention in comments.

 

Originally Published in RichifyMeClub

 

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